Want to learn the inside skinny about a company, but don't have any contacts in the analyst community or at the company itself? Then get yourself a proxy -- a public document that discloses all of the company's third-party transactions, as well as the most intimate details of management's compensation schedule.
The typical proxy statement, which is filed annually with the
Securities and Exchange Commission
, contains a wealth of information. It discloses all the important stuff, like the management's background and relationships that the company or its officers might have with the firm's customers, as well as information about top management's equity position in the corporation and the terms of their retirement and
option contracts. In other words, it's got all of the juicy details the company doesn't want you to know, but by law must provide to the SEC.
So what should individual investors look for?
Officers or directors who have little or even no experience in the industry.
Also, see if top managers are being paid exorbitant fees for their services. Both of these are warning signs that management may not have the shareholders' best interest at heart.
The amount of common stock each officer or director owns.
Note that I said common stock. That's because I want to see a substantial portion of their net worth tied up in the company. That assures me that they'll do everything in their power to enhance the value of common shares.
latest proxy statement, management owned just 2% of the outstanding stock. That information could've been useful to common shareholders before the company announced Monday that it's filing for Chapter 11 bankruptcy protection.
This is when a company lowers the strike price at which insiders can purchase the common stock. Although there's nothing illegal about it, the move offers insiders a chance to lower their cost basis in the stock. However, that leaves the common shareholder with no such advantage.
By this, I mean companies that give out loans or other special perks. I'm not talking about the company car or even a fancy Christmas party -- I'm talking about gifts or payments that are out of the ordinary. For example, last year's
proxy filing revealed that the company made a $3 million loan to its then-CFO Heidi Miller to buy stock. But when Miller and priceline parted ways nine months later, the company simply forgave the loan. Such a freebie is ludicrous, particularly when the common shareholder has fared so badly. (The stock declined roughly 92.6% from March through early November 2000.)
Excessive relocation expenses, payments for personal insurance policies or other corporate freebies.
Although sometimes legitimate, these expenses are more often than not a waste of precious capital because that money could have otherwise been plunged back into the business.
In one particularly good example,
1999 and 2000 proxy statements disclosed that ex-CEO Jill Barad signed a deal giving her the option to buy her office furniture for $1. Toss in $3.3 million to cover personal tax expenses, not to mention forgiveness of $7.2 million in loans and a $26.4 million severance package when she left the company in February 2000.
The list of major shareholders in order of their holdings.
Review it. You may learn that your favorite company is at the mercy of a much larger player in the industry or of a mutual fund that owns a large percentage of its stock. It's not always a bad thing. But sometimes a conflict of interest occurs, when the fund or large stockholder attempts to dictate corporate policy. When that happens, the common shareholder can get the short end of the stick.
You can request a proxy statement by calling or writing the company. Or, go to the
www.sec.gov Web site and search the database for the document.
In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to